International Finance Corporation (IFC), the private sector lending arm of the World Bank Group, is in the final stages of floating bonds worth $500 million in local currency in Nepal. 

The multilateral lender has sought permission from Nepal Rastra Bank (NRB) to issue the instruments. IFC had obtained approval from the Finance Ministry to issue rupee bonds two years ago, but it could not do so due to lack of legal provisions. 

Last year, the Securities Board of Nepal (Sebon) amended the Securities Registration and Issue Regulation, and opened the way for international financial institutions like IFC to issue local currency bonds.

Subsequently, IFC applied for permission at NRB to issue bonds worth $500 million in Nepali currency. After getting the central bank’s go-ahead, IFC will have to obtain permission from Sebon, the regulator of the securities market. 

As per the Securities Registration and Issue Regulation introduced by Sebon, international financial institutions wishing to issue rupee bonds are required to state the objectives behind issuing the instruments, the areas where investments will be made, the rate of return on bond and the maturity period. 

IFC, according to sources close to it, is planning to invest the funds raised from the bond issuance in areas like hydropower and commercial agriculture, among others. Both institutional and individual investors will be allowed to purchase the bonds issued by IFC.  

However, IFC is yet to determine the interest rate and the maturity period of the bond. “The rate of return on the bond will be determined by the market,” said the source. “IFC will make sure the rate of return is attractive to potential investors besides being careful not to distort the market.” 

Meanwhile, the multilateral lender is planning to set the maturity period well above five to seven years. “As bonds are a way of raising money for long-term investment, IFC is planning to set the maturity period well above five to seven years,” said the source. 

IFC’s treasury team will be visiting Nepal to assess the market and meet with the regulators. “Probably, the group will arrive in Nepal in a couple of weeks,” said the source. 

Although IFC’s move will make the country’s securities market more mature, given the liquidity shortage in the domestic financial market, there is a big chance of the bond issue being undersubscribed. 

With banks and financial institutions offering interest rates as high as 11 percent on one-year fixed deposits, it would be interesting to see what rate of return IFC offers on its bonds.